12 Stock Tips from Market Rider

I like readingmarket rider’s articles in Inquirer (Den Somera, licensed stockbroker). And his article on Typical Retail Investors is once again a very good read. Here he mentions how some market participants rely on one-off “homeruns” or huge one-time-big-time flights of certain stocks in PSE because of speculations, rumors and stock plays.

Very tempting indeed, like a get rich quick investment that is most likely too good to be true. Seriously though, surely money can be made out of these runs, that is if you are able to time and spot them at the right moment. Otherwise, you’ll always be on the lookout for potential homeruns instead of using the same effort and energy in conducting due diligence on quality stocks, that in the long run, will also provide quality returns.

He then provides 12 practical tips for “serious investing”. You can read the full article here, I just condensed the tips into headers, then added a few more cents of my own insights.

1. “Ignore the news”

Yes undertake due diligence and monitor your stocks regularly but not necessarily daily. Just be attuned for major trend reversing developments macro and micro. But aside from that, ignore the daily noise. If you seriously believe that you bought a quality stock at a quality price, regardless of the daily volatility and noise, you will be profitable in due time.

2. “Understand your ‘risk of loss'”

For me this is simple. Only risk the money you can afford to lose. As in 100% of it. The chances may not be probable but it provides you good attitude towards risk and towards money. Don’t let this make you uber-conservative but still know your limits. This is like preparing for the worst. And besides, if you think you’re entering a losing trade, why enter in the first place?

3. “Diversify”

An old saying of “do not put all your eggs in one basket”. Invest in various industries, minimize or totally avoid concentration risk.

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4. “Have Core Positions on Dividend Stocks”

It is easy to spot which companies pay dividends every year, if you know where to look. This gives a sure income for you with ROI rates a lot better than time deposits. Plus the possible capital appreciation from these generous stocks.

5. “Reinvest Your Dividends”

Agreed. Don’t pull out and withdraw your cash dividends, and instead use it to grow your pool of investment funds. Make your earnings work for you. A tricky play though for stock dividends because normally, prices drop commensurate to the volume of new stocks introduced in the market as dividends. So you either wait for the price to go up again, or sell at the revised lower price, turn stock into cash and buy other stocks. Depends on how much you trust your stock pick.

6. “Cost-Averaging”

Don’t go all in. Take advantage of the dips, and if possible, buy regularly, like monthly regardless of the price. Your buys in lows should offset your buys in highs. Don’t be afraid to get left behind, but balance it with decisiveness and planning.

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7. “Have a plan”

As mentioned. Have a trading plan and stop-loss plan, plan your way in (buy) and way out (sell). Don’t get too excited with the mad rush and stick to your plan. Easier said than done though. This goes without saying that your planned entry and exit are based on due diligence, fundamentals and some technicals.

8. “Slowly but surely”

Market Rider hits the nail on its head: “Building true wealth is more a product of deliberate planning than by chance.” So true, not just for stocks but in all other wealth building endeavors.

9. “Support and Resistance”

Learn to read graphs and support and resistance shall be easy to spot and be your friends. Even bear downturns and bull runs need to rest. And a break on these lines can be a signal as well for something major.

Again, learn to read graphs. There are many guides available in the web. My personal goal is to be an actuarian, one who uses both fundamentals for the long term trend and technical analysis to spot when to enter and exit.

11. “Nothing lasts forever” and 12. “Buy at corrections”

Ignore the daily noise but don’t get lost and drunk in the party. Remain sober. The market is driven by fear and greed. If you also act on fear and greed, then you’ll easily go down with the market. Be realistic. If based on your computations prices are already unrealistically high, then don’t be greedy and get ready to get out! On the other hand, as Peter Lynch says, “do not catch a falling knife”. Allow it to stabilize first.

As they say, smart money exits before the peak. They start to sell to the dumb money or to those who join the party belatedly towards the peak. Then the fire begins. And when the dumb money panics and sells at whatever low price just to get out of the fire, the smart money begins to pick up bargains.

The stock market is a combined decision-making from all traders, big and small, whether informed or not, whether it manifests in the PSEi trends or not. Similarly, let us learn from one another’s insights! Looking forward to a great 2013 stock trading.

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